Sequential Exchange with Stochastic Transaction Costs ∗
نویسندگان
چکیده
We analyze the bilateral trade of divisible goods in the presence of stochastic transaction costs. Mutual best-response conditions are applied to a model of optimal investment under uncertainty. The first-best solution involves a single transaction, but such behavior is not incentive compatible without courtenforceable contracts. We solve for a second-best policy in which some gains from trade can be realized through a gradual transfer. When the transaction cost follows a geometric Brownian motion, the optimal path of play in a subgame-perfect equilibrium is unique, and a closed-form solution can be obtained. A number of comparative statics and welfare implications are presented as well as real-world examples. The analysis involves developing a novel set of conditions for restricting the strategy space in continuous time. JEL Classification: C73, C78, D23, D86, L14
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